What To Expect From The Federal Reserve
By PATRICK LAVERY
What seemed optimistic 11 months ago, only to devolve into being far-fetched by the middle of the year, is now likely.
When the Federal Open Market Committee holds its final two-day meeting of 2024 this week, the dream floated by some officials back in January of cutting the Fed’s key interest rate three times before the calendar turned to 2025 is going to become a reality, according to most experts and market watchers.
After a significant cut of a half-percentage point in mid-September – the first change in the federal funds rate in more than a year – a quarter-point slash followed in early November, and another quarter-point is expected to be shaved off by the time the FOMC wraps up its business on Wednesday.
CME Group’s FedWatch tool, which The Mortgage Note has tracked while previewing many of the Fed meetings this year currently places the odds for a quarter-point cut at 95.3%, with the remaining 4.7% betting that the rate will be held in place.
FedWatch is a little less sure about January and even further into early 2025, guessing at an 81% clip that the rate will be frozen at the first meeting of the new year, and becoming more uncertain past that.
That tracks with Reuters’ survey last week of approximately 100 economists, over 90% of whom believe a 25-basis point cut is coming in a couple of days.
There are rumblings that the Fed will cut rates three more times in 2025, though a series of four cuts has been rumored in some corners.
On the contrary, some are predicting just two further rate reductions in the year ahead.
To single out a unique point of view, Investopedia openly wondered last week if the Fed was running out of reasons to slash rates after just two cycles (though assumedly three after this week).
All that being said, it may be worth noting, seeing as economic policies customarily shift depending on the balance of power in Washington, this week will mark the final FOMC summit in the presidency of Joe Biden. The next meeting is scheduled to convene on January 28, 2025, just over a week after President-elect Donald Trump takes the oath of office for a second time.
There is some worry among economists that Trump’s monetary policy proposals for this term, headlined by major changes to import tariffs that he plans to implement quickly, will be inflationary. (This Investopedia article called Trump’s plans a “wildcard” for the Fed.)
And it turns out that such concerns are coming at the worst time for those who keep in mind that Federal Reserve Board Chairman Jerome Powell has said for months, if not years, that driving inflation down below 2% is the guiding force of all Fed decisions.
As USA Today reported, inflation actually increased in November, to 2.7%, its second straight month on an upward trajectory and the biggest jump since July. Core inflation, excluding volatile sectors such as food and energy, was unchanged at 3.3%.
Mortgage rates have come down in recent weeks following the two successive Fed cuts, but Ahmed Rahman, associate professor of economics at Lehigh University, doesn’t see as strong a correlation as is usually assumed between the two events, and cautions against expecting too much more downward action.
“Past rate cuts have not resulted in falling mortgage rates,” Rahman told The Mortgage Note last week. “Fed actions, which impact the federal funds rate, more directly impact short-term rates. Longer-term rates such as those for 30-year fixed mortgages are shaped more by housing market considerations, and by longer-term factors such as the size of the federal debt. Low stocks of existing homes and high debt overhang keep mortgage rates elevated.”
Rahman does agree with the majority of the field on the dual forecast for the end of this year and the beginning of next: one more rollback on Wednesday, then perhaps no more action for a while.
“The Federal Reserve will most likely cut rates by 25 basis points at their next meeting,” he said. “This however might be considered something of a ‘hawkish cut’ – given continued inflationary pressures and a robust labor market, the Federal Reserve may pause on future rate cuts.”
Meanwhile, Kiplinger’s suggests that now may be the time to explore opening a long-term CD account, for those who have been entertaining such a possibility.
Finally, what will be interesting to observe and analyze in the wake of Wednesday’s meeting wrap-up will be the release of the Fed’s final Summary of Economic Projections of 2024. Keeping in mind the overarching 2% inflation target, the SEP provides a tangible, mathematical snapshot of where policymakers believe the numbers are going, and when they expect to get there.
Those numbers may not always hold exactly true, but if even fairly accurate, they lend credence to the course of action officials may eventually settle on.